The stimulus strategy

Economists may be skeptical, but rebate checks just might help out

New Yorker

When President Bush signed into law last week a fiscal stimulus package of income-tax rebates and business tax breaks, it was the first good news for American consumers in a while. The plan will give many families a $1,200 windfall, and it comes with a message Americans always like to hear: We can spend our way to prosperity.

Turning those checks into new televisions and T-bones, the argument goes, will keep recession away. This is a familiar and popular idea—politicians on both sides of the aisle praised the plan—but it once seemed like heresy.

In 1932, with America suffering through the Great Depression, Franklin Roosevelt, the Democratic candidate for President, attacked President Herbert Hoover for spending too much trying to fight the downturn. Hoover, he charged, was recklessly running up the deficit and driving the country toward “the poorhouse.”

The Democratic platform that year called for “an immediate and drastic” cut in government spending and a balanced budget. Not for long, though. Soon after Roosevelt was elected, the nation’s colossal unemployment rate and stagnant economy had him casting around for other solutions, including government-financed employment and public-works programs.

At about the same time, the intellectual foundation for fiscal-stimulus plans was being laid out by John Maynard Keynes. Keynes argued that when fear made consumers and businessmen excessively cautious in their investing and spending, government could temporarily step in. Tax cuts or government-generated demand in the form of public spending could keep the country’s factories and service centers humming until the “animal spirits” of consumers and businessmen rebounded. Keynes’s ideas were only halfheartedly tried during the New Deal.

But after huge military spending on the Second World War—arguably the biggest fiscal-stimulus program in history—helped bring an end to the Depression, fiscal stimulus became a key policy weapon. In the 1950s, the Eisenhower administration turned quickly to deficit spending when the economy slumped, and the Kennedy and Johnson administrations later used Keynesian rhetoric to push for tax cuts and spending increases.

In recent years, monetary policy, which works by changing interest rates, has superseded fiscal policy as the favored tool for jump-starting the economy. But when the U.S. economy stumbled in 2001 the Bush administration quickly enacted a $38 billion tax-rebate plan. Popular as Keynesian fiscal policy may be, many economists are skeptical that it works.

They argue that fine-tuning the economy is a virtually impossible task, and that fiscal-stimulus programs are usually too small, and arrive too late, to make a difference. And since the money to pay for fiscal programs has to be borrowed and paid back in taxes, it’s a wash for the economy as a whole. If the government gives you $600 but you know you’re eventually going to have to pay $600 back in taxes, it may not feel like much of a gift.

The economist Russell Roberts argues that using fiscal policy to get the economy going is like “taking a bucket of water from the deep end of a pool and dumping it into the shallow end.” The skeptics are right that fiscal policy isn’t guaranteed to succeed. But theory and history suggest that there are circumstances in which making businessmen and consumers feel more flush can help a stalled economy.

The Second World War is one example. Or take Japan: Since the country’s economy remained stagnant through the nineties despite hundreds of billions of dollars in public spending, its experience is often cited as an example of the futility of Keynesianism.

But, as the macroeconomist Adam Posen has shown, Japan’s real mistake was not in using fiscal stimulus but in failing to use it well—the government consistently spent less than was needed, and undercut its efforts in one year by raising taxes or cutting spending the next.On the single occasion when the government did wholeheartedly use fiscal policy, Japan’s economy grew briskly.

In the U.S., meanwhile, business tax breaks have helped spur investment booms at least four times since the early '60s, and recent work suggests that the 2001 rebate sharply boosted consumer spending. Fiscal stimulus isn’t a panacea, but it can be a useful tool if it’s timely and targeted. On those counts, the new stimulus plan, though imperfect, is better than expected.

It is certainly timely: The package was passed in only a few weeks, and the rebate checks will be out by May. It’s not ideal in its targeting—Congress omitted policies that are especially effective in generating spending, including the extension of unemployment benefits and food stamps—but it does limit the rebates to families with incomes under a $174,000. Given that two-thirds of all income taxes in the United States are paid by households that earn more than that, this is a startlingly redistributive move from an administration not known for such measures.

More important, it should make the stimulus plan more effective, because the people getting the rebates are not, for the most part, the people who will be paying for them. And since the wealthy save a far higher percentage of their incomes than the less well-off, the plan essentially takes money from people who would probably save it and gives it to those who will likely spend it. In the long run, this isn’t sustainable—the current crisis has shown that Americans need to save more and borrow less. But in the short run a little spending spree could be just what an idling, anxious economy needs.

URL: http://www.msnbc.msn.com/id/23228023/

    As a general rule governments usually mess up the economy if tinkered with too much. The business cycles in a Free Enterprise system are very complex and entail many economic, political and psychological factors. President Bush's fiscal stimulus plan just might have a good short term effect on the US economy in a recession. A good US President will watch the economy carefully , basically letting the "system correct itself" with a timely "tax break tweaking" every now and then. In my opinion, Hilary Clinton is the "best man for the job" on the US economy front.

tags: bush  hilary clinton  economy  us  america  tax rebates  politics  2008  

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